Reserve Bank on Monday kept the key interest rates unchanged citing elevated food inflation, rupee depreciation and uncertainty over foreign fund inflows.

The repo rate at which the RBI lends to the system has been retained at 7.25 per cent, while the cash reserve ratio will continue to be 4 per cent.

“The monetary policy stance has been informed by the evolving growth-inflation dynamics, the balance of risks as well as recent developments in the external sector,” RBI Governor D Subbarao said in the mid-quarter policy review.

He specifically cited the decision of the US Fed to trim the growth stimuli in a phased manner and articulated concern over risks coming “on account of uncertainty over policies of systemic central banks.”

The May 22 announcement has led to fund outflows from emerging markets, including India, and hence, depreciation in the rupee, which is already facing trouble over the high current account deficit, touching an alarming 6.7 per cent in the December quarter.

To reduce the current account deficit (CAD) to a sustainable level; the near term challenge is to finance it through stable flows,” the statement said.

Rupee has declined by 5.8 per cent since January 1 and touched a record low of 58.96 to a dollar last week. It was trading at 57.84 during the morning trade.

In its guidance, the RBI, particularly, flagged risks on inflation, saying “it is only a durable receding of inflation that will open up the space for monetary policy to continue to address risks to growth.”

The status quo maintained by RBI has dashed hopes of interest rates cut which was widely expected by the market.

The Highlights:

Key short term lending rate (repo rate) kept unchanged at 7.25 per cent;

Cash reserve ratio unchanged at 4 pc;

Rupee fall, external sector risks and elevated food inflation areas of concern;

Continuing weakness in manufacturing needs to be urgently reversed;

RBI asks government to create conducive environment for private investment, improve project clearances to promote growth;

Durable receding of inflation will open space for monetary policy action;

Reducing CAD is a challenge;

RBI for stable foreign inflows to finance it;

Steps to curb gold imports, easing commodity prices to lower CAD in 2013-14;

Balance of Payments, inflation and growth rate to determine future monetary stance;

Need to be vigilant about global uncertainty and its impact on capital flows;

RBI ready to use all av ailable instruments to deal with any adverse development in external sector and positive rating action should have favourable impact on investor confidence. (The Hindu)